Revenge Of The Value Investors

With surgical precision, conservative fund managers have carved out the best stocks from the body financial.

Imagine the high school chess whiz tripping up the football team’s brawny captain. Or picture the conservative, buttoned-down accountant winning the girl over the burly motorcycle mechanic. You’d need to conjure up images of just that sort of “revenge of the nerds” scenario to understand just how value investors felt this past spring. After three years-1996, 1997 and 1998-of watching investors in flashy, revved-up growth stocks kick sand in their face, value managers finally had reason to gloat as their kind of stocks started to realize some impressive gains.

Suddenly, the stock market had tired of the Intels, the Lucents and the like, and instead began to shower its affections on such cyclicals as oil, retail or transportation stocks, helping shares in those groups rise. Needless to say, this was quite an about-face. A stampede by technology shares at the end of last year had a lot of gurus talking about a growth market-a stock market ruled by corporations whose earnings or profits were climbing at a rapid rate. Instead, with the price-to-earnings ratio of the Standard & Poor’s 500 index-the gauge for the broader market-in the 30s, its highest level ever, it seemed that investors were finally backing more reasonably priced shares. It looked as if it were value investing’s turn to shine.

Take the investments of President and Chief Portfolio Manager Randall Eley of the Edgar Lomax Co., for instance. As of May 31, Eley’s mutual fund and institutional accounts, stocked with companies like Sears (NYSE: S), DuPont (NYSE: DD) and Minnesota Mining & Manufacturing (NYSE: MMM), were up 12.2%. By comparison, the S&P 500 was up 6.4%. “We in value investing have learned to be patient,” says Eley. “There are times when growth stocks outperform the companies we like, but in the long run things even out.”

To appreciate how significant this reversal in stock leadership has been, consider that according to Morningstar, the Chicago firm that tracks the mutual fund industry, the average large-cap growth fund posted a total return of 35.45% last year. The average large-cap value portfolio mustered only a paltry 12.61% gain.

The moral of the story? Different stock-picking styles excel at different times. Growth stocks, shares of companies that are reeling in earnings faster than the majority of corporations, tend to do well when the economy is expanding and business booming. When the economy hits the skids, however, growth stocks often drop in price. Value shares, meanwhile, tend to do best at the end of a recession, when investors are looking for ways to put their money to work. During economic slowdowns, value shares tend to weather any rough periods in the stock market
with less of a loss in value than growth shares.

In this story, you’ll find tips from some of the best value stock pickers around. We’ve tailored this article for a variety of investors. Perhaps you’re learning the ins and outs of the market. Maybe you’re trying to work with a financial planner to select a few stocks to hold on to for

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